ZEW Economist Friedrich Heinemann on the ECB’s New Inflation Target


“Continuation of Ultra-Loose Monetary Policy Now Easier to Justify”

The ECB Governing Council has decided to change its inflation target. Previously, the central bank aimed to keep inflation “below, but close to, 2 per cent”. The “below but close” wording will be dropped in future, so that the ECB will now pursue a symmetrical 2 per cent inflation target. Proposals for formulations that explicitly set the target at an average inflation rate, on the other hand, have not gained acceptance. In addition, costs of housing, including for owner-occupied real estate, shall be more strongly taken into account in the measurement of inflation. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter:

“The fact that the Governing Council has not opted for an explicit reference to the average inflation rate in its new inflation target should be viewed in a positive light. This would have been seen as a clear signal to allow inflation of well above two per cent for years to come. Nevertheless, the new target paves the way for higher inflation rates. With inflation below two per cent now being considered just as bad as inflation above two per cent, it will be even easier for the ECB Governing Council to justify a continuation of ultra-loose monetary policy and bond purchases in the years ahead. The explicit statement that the target may have to be moderately exceeded during a transitional phase also further weakens the binding nature of the target as an upper limit.

This strategic decision comes at an unfortunate time. Just at the moment when some euro states have become fully dependent on the ECB’s bond purchases due to the crisis, the ECB Governing Council is lowering its long-term ambition for limiting inflation. This can be interpreted as a signal that, even in its strategic decisions, the ECB is anxious to ensure that high debt levels are secured. The stronger inclusion of housing costs, on the other hand, is to be entirely welcomed. The housing sector in Europe has seen inflationary processes that strongly affect consumers but had not yet been sufficiently taken into account in measuring inflation.”